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Finance & Accounting, Small Business Loans

Small Business Funding Options: Which is Right for You?

Financing can be tricky for small businesses. Some loans are good for startups, and others are better for established businesses. This guide can help you understand the benefits of different types of loans to help you determine what is right for you.

Your guide to small business funding options

Bank Loans

While most national lenders and community banks offer loans for small businesses, the availability of this type of funding has diminished significantly in the last five years. For small business owners with strong credit history and substantial cash flow, bank loans are a good option because they typically have lower lending rates than other types of financing. However, any business owner who wants to take this route for funding should expect to provide detailed financial information, a business plan, and collateral.

One of the benefits of getting a bank loan is that smaller, local banks often have slightly easier underwriting for loans, but the larger lending institutions often have better interest rates. The processing time on bank loans is something else to consider, too.  The application and approval process typically takes several weeks. If you are in the financial position to be approved for a bank loan and you have the time to wait for a loan application to be processed, this might be a good option for your business.

Credit Cards

More than a few small businesses have been launched with funding from personal credit cards. Why? It’s readily available cash, and personal credit cards are much easier to obtain than a traditional business loan. But this doesn’t necessarily mean it’s the best option for your business. When you consider the benefits of different types of loans, you certainly need to factor in interest rates. And, credit cards typically have much higher rates than loans. Furthermore, using personal credit to fund a business is risky. If the business should fail, you could damage your credit which could prevent you from being able to buy a home or a car in the future.

Credit cards shouldn’t really be thought of as a type of business loan and should rather be considered a backup source of financing for a specific need. You will also want to make sure that you definitely have the means to pay back the amount owed to prevent any risk to your credit.

Lines of Credit

Many banks that offer bank loans also offer lines of credit. The benefit of this type of small business funding is flexibility — good for supplementing cash flow when you want to take advantage of a particular business opportunity or fund a necessary business expenditure.

Most lines of credit offered by banks range from $10,000 to $100,000, and they are often accessible in the form of a bank credit card. Using a line of credit for business expenses can also be a good way to keep track of accounting and to separate personal from business purchases. A small business line of credit is also available through Kabbage.

Loans from Family or Friends

Obtaining a loan from a family member or a friend is often all that is needed for small business owners. There are of course many benefits to getting this type of funding. First, the funds are typically available quickly once the terms have been set. And, the interest rate is often far less than what a bank or other lender would be offering. However, there are often strings attached to a loan from a loved one. To prevent any conflict or confusion down the road, it’s always a good idea to clearly spell out the terms of the loan and clearly define if the money is a loan or a gift. Having clarification up front is essential for keeping the peace. Trust us.

Alternative Lending

There are new players in the realm of small business lending. Alternative lenders (like us!) offer business loans to small business owners in the form of quick, flexible funding. Unlike banks that look solely at collateral and credit scores, one of the benefits of getting a small business loan is that alternative lenders leverage a broader range of markers such as comments on social media sites, online reviews, and bank transactions. This makes funding more accessible, and in fact, most business owners can find out within minutes if they are approved and the amount of the short-term loan offered to them.

Borrowers will pay higher interest rates with this type of funding, but it is often more beneficial for a business owner who needs cash quickly. There are also no costs incurred until money is taken.

There are a variety of benefits of different types of small business funding options and risks worth considering. By knowing your options and carefully determining what is right for your business, you’ll be able to choose the right funding option for your business.

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Kabbage Team

Kabbage is here not only to provide access to the small business funding you need, but to also help you grow your business through free marketing tips, webinars, tools and more. Is there something you'd like us to cover or want to get your small business featured on our blog? Send us a note at content@kabbage.com.